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Is Lloyds’ share price undervalued?

Is Lloyds’ share price undervalued?

Lloyds’ [LLOY] share price has been volatile recently. From hitting a year low of £23.64 on 21 September, the stock gained over 15% by 8 October. Among the reasons for investor cheer were Boris Johnson's pledge to help first time buyers onto the housing ladder. The good news couldn’t last, though, with Lloyds’ share price finishing last week down 4.8% as the UK government introduced its three tier lockdown strategy, and renewed concerns over the economy surfaced.

Considering Lloyds’ share price is down over 50% this year, is the stock a rebound play?

 

 

Why Lloyds' share price might be attractive to investors

 

1. Lloyds’ share price might be a bargain

Investors like a bargain, especially if there’s a chance an asset or stock is likely to experience a rebound. Lloyds’ share price has plummeted this year as the impact of the coronavirus hits the UK economy. As the UK's biggest mortgage lender, the bank has had to set aside billions in the event of loan defaults, which hit first half earnings hard.

Brexit has also been another thorn in the bank’s side, with Lloyds’ share price volatile even before the outbreak as investors weighed up the impact on the UK economy. 

Yet, if there’s an end in sight on either issue, some of the pressure on Lloyds’ share price could disappear.

 

2. New direction in 2021

Under outgoing CEO Horta-Osório, Lloyds has become a well-capitalised, streamlined operation. However, the fact remains that the bank's stock is currently trading 57% lower than its value when the outgoing CEO took on the role back in 2011. One recurring criticism is the bank's near mono-focus on the UK retail market. This has left it vulnerable to economic and political headwinds, alongside own-goals like the PPI saga that cost the bank billions. So, while Horta-Osório’s leadership has strengthened the bank’s business, Lloyds’ share price has continued to slump.

 

57%

Lloyds' share price drop since Horta Osório took the helm in 2011

 

 

In 2021, this could all change as fresh leadership takes charge following Horta-Osório's resignation. Expectations are that whoever inherits the hot seat will expand Lloyds’ wealth and insurance divisions, extending parts of the business that aren’t dependent on interest rates. If the new CEO is able to convince the shareholders of a meaningful shift in strategy, then Lloyds’ share price could pick itself off the floor.

 

3. Return of the dividend

Word is that Lloyds is looking to bring back the dividend sooner rather than later. Lloyds, along with every other UK bank, suspended dividends earlier this year at the behest of the Bank of England's Prudential Regulation Authority in order to shore up capital.

Yet, according to This is Money, Lloyds CEO Horta-Osório said at September's Barclays Global Financial Services Conference that the bank’s capital buffers exceed the amount required by the regulator. That puts Lloyds in a good place to pay out a dividend next year. Of course, this is all subject to banks getting the green light from the regulator when they discuss the issue in the next few months.

 

Headwinds facing Lloyds’ share price

Lloyds’ share price recovery is largely dependent on how fast the broader UK economy can recover, but the bank faces other significant headwinds too. Even before the coronavirus, interest rates were low, squeezing just how much money Lloyds could make from its lending products.

Casting more doubt on a quick economic recovery is Moody’s, who downgraded the UK’s credit status over the weekend. In Moody’s analysis, they cited the UK economy's dependence on the service sector, the risk of more lockdowns and “lingering uncertainty over Brexit”. The longer these two issues dog the UK, the longer Lloyds’ share price will be held down.

For investors hoping to gain from Lloyds’ share price as it stands, it may be a case of holding onto the stock until 2021. Among the analysts tracking the stock on the Financial Times, Lloyds has an average price target of 37p, which would see a 36.4% upside on the current share price.

 

Market cap £19.248bn
PE ratio (TTM) 67.82%
Diluted EPS (TTM) 0.40
Quarterly revenue growth -69.50%

 

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